Chapter 2Chapter 2

The Balance SheetThe Balance Sheet

HFT 3431HFT 3431

Questions Answered by Questions Answered by Balance SheetBalance Sheet

• Amount of Cash on Hand?Amount of Cash on Hand?

• What is the Total Debt?What is the Total Debt?

• What is Funding Mix?What is Funding Mix?

• How Much is Owed to the Hotel?How Much is Owed to the Hotel?

Questions Answered by Questions Answered by Balance SheetBalance Sheet

• What are the Tax Liabilities?What are the Tax Liabilities?

• Can Current Debt be Paid?Can Current Debt be Paid?

• What is the Financial Strength?What is the Financial Strength?

• How Much have Stockholders How Much have Stockholders Invested in the Assets?Invested in the Assets?

Uniform System of Uniform System of AccountsAccounts

• Standardized Accounting SystemStandardized Accounting System

• Industry DrivenIndustry Driven

• Basic FormatsBasic Formats

• Departmental Statement and Departmental Statement and SchedulesSchedules

Uniform System of Uniform System of AccountsAccounts

• Explanations and DiscussionsExplanations and Discussions

• Allows Comparison - Other Allows Comparison - Other Operations and SelfOperations and Self

• Can be Used by Any Size Can be Used by Any Size OperationOperation

• Property Level Designed UseProperty Level Designed Use

Balance Sheet LimitationsBalance Sheet Limitations

• Does Not Reflect Current Values Does Not Reflect Current Values of Assets (Booked According to of Assets (Booked According to Cost Principle)Cost Principle)

• Does Not Include Some Things Does Not Include Some Things of Value Such as Personnel, of Value Such as Personnel, Location, Customer Base, Location, Customer Base, GoodwillGoodwill

Balance Sheet LimitationsBalance Sheet Limitations

• Becomes Quickly Outdated Becomes Quickly Outdated (static, not dynamic)(static, not dynamic)

• Some Account Balances are Some Account Balances are Estimates Such as Depreciation Estimates Such as Depreciation and Estimates for Uncollectiblesand Estimates for Uncollectibles

Balance Sheet - The Balance Sheet - The Statement of Financial Statement of Financial

PositionPosition

• Assets = Liabilities + EquityAssets = Liabilities + Equity

• Statement of Assets, Liabilities, Statement of Assets, Liabilities, and Owners’ Equity at a Point in and Owners’ Equity at a Point in TimeTime

Balance Sheet - The Balance Sheet - The Statement of Financial Statement of Financial

PositionPosition

• AssetsAssets

Current AssetsCurrent Assets

Noncurrent ReceivablesNoncurrent Receivables

InvestmentsInvestments

Property and EquipmentProperty and Equipment

Other AssetsOther Assets

Balance Sheet - The Balance Sheet - The Statement of Financial Statement of Financial

PositionPosition

• LiabilitiesLiabilities

Current LiabilitiesCurrent Liabilities

Long Term DebtLong Term Debt

Deferred Income TaxesDeferred Income Taxes

Commitments / ContingenciesCommitments / Contingencies

Other Long-Term LiabilitiesOther Long-Term Liabilities

Balance Sheet - The Balance Sheet - The Statement of Financial Statement of Financial

PositionPosition

• Owners’ EquityOwners’ Equity

Capital StockCapital Stock

Additional Paid In CapitalAdditional Paid In Capital

Retained EarningsRetained Earnings

Treasury StockTreasury Stock

Balance Sheet Formats and Balance Sheet Formats and StructureStructure

• Account Format - Assets on Left Account Format - Assets on Left and Liabilities and Equity on and Liabilities and Equity on Right (page 46)Right (page 46)

• Report Format - Assets First Report Format - Assets First Followed by Liabilities and Followed by Liabilities and Equity (page 47)Equity (page 47)

Balance Sheet Formats and Balance Sheet Formats and StructureStructure

• Current Assets - Converted to Current Assets - Converted to Cash or Used in Operation in Cash or Used in Operation in One Year or Normal Operating One Year or Normal Operating Cycle Cycle

• Listed in Order of Liquidity Listed in Order of Liquidity

Balance Sheet Formats and Balance Sheet Formats and StructureStructure

• Cash (All Forms)Cash (All Forms)

• Marketable SecuritiesMarketable Securities

• ReceivablesReceivables

• InventoriesInventories

• Prepaid ExpensesPrepaid Expenses

Noncurrent AssetsNoncurrent Assets

• Noncurrent Receivables - not Noncurrent Receivables - not expected to be collected within expected to be collected within one year - owners are shown one year - owners are shown separateseparate

• Investments - securities, land not Investments - securities, land not in use, and affiliate advances not in use, and affiliate advances not to be collected within one yearto be collected within one year

Noncurrent AssetsNoncurrent Assets

• Property and Equipment - Fixed Property and Equipment - Fixed Assets, Capital Leases - Less Assets, Capital Leases - Less accumulated depreciationaccumulated depreciation

• Smallwares - New USOA Smallwares - New USOA Recommends to Expense or Recommends to Expense or Write off Over 3 YearsWrite off Over 3 Years

Noncurrent AssetsNoncurrent Assets

• Other Assets - Deferred Charges, Other Assets - Deferred Charges, Security DepositsSecurity Deposits

• Preopening Expenses - New Preopening Expenses - New USOA Recommends to Expense USOA Recommends to Expense in Current Period in Current Period

Other AssetsOther Assets

• GoodwillGoodwill

• Cash Surrender Value of Life Cash Surrender Value of Life InsuranceInsurance

• Deferred ChargesDeferred Charges

• Possibly Deferred Income TaxesPossibly Deferred Income Taxes

Balance Sheet Formats and Balance Sheet Formats and StructureStructure

• Current Liabilities - Obligations Current Liabilities - Obligations expected to be Satisfied in One expected to be Satisfied in One Year or Normal Operating CycleYear or Normal Operating Cycle

Current Liability Current Liability PresentationPresentation

• PayablesPayables

• Advance DepositsAdvance Deposits

• Current Maturities of Long Term Current Maturities of Long Term DebtsDebts

• Dividends PayableDividends Payable

• Income Taxes PayableIncome Taxes Payable

Long Term LiabilitiesLong Term Liabilities

• Obligations Beyond One YearObligations Beyond One Year

• Notes PayableNotes Payable

• Mortgages PayableMortgages Payable

• Bonds PayableBonds Payable

• Capitalized Lease ObligationsCapitalized Lease Obligations

• Possibly Deferred Income TaxesPossibly Deferred Income Taxes

Owners’ EquityOwners’ Equity

• Preferred Stock, Par @ $$$Preferred Stock, Par @ $$$

• Shares AuthorizedShares Authorized

• Shares IssuedShares Issued

• Common Stock, Par @ $$$Common Stock, Par @ $$$

• Shares AuthorizedShares Authorized

• Shares IssuedShares Issued

Owners’ EquityOwners’ Equity

• Treasury StockTreasury Stock

• Additional Paid in CapitalAdditional Paid in Capital

• Retained EarningsRetained Earnings

Owners’ EquityOwners’ Equity

• Sole Proprietorship CapitalSole Proprietorship Capital

• Partnership - Show Each Partnership - Show Each Owner’s CapitalOwner’s Capital

• Withdrawal AccountsWithdrawal Accounts

FootnotesFootnotes

• Significant Accounting PoliciesSignificant Accounting Policies

• Accounts and Notes ReceivableAccounts and Notes Receivable

• InventoriesInventories

• InvestmentsInvestments

FootnotesFootnotes

• Property and EquipmentProperty and Equipment

• Current LiabilitiesCurrent Liabilities

• Long Term DebtLong Term Debt

• Capital StockCapital Stock

• Employee Benefit PlansEmployee Benefit Plans

FootnotesFootnotes

• LeasesLeases

• Segments of BusinessSegments of Business

• Supplemental Financial Supplemental Financial InformationInformation

• Commitment/Contingent LiabilityCommitment/Contingent Liability

• Income TaxesIncome Taxes

Balance Sheet AnalysisBalance Sheet Analysis

• Comparative Statements or Comparative Statements or Horizontal Horizontal AnalysisAnalysis

• Compute Absolute Change Compute Absolute Change (dollar difference)(dollar difference)

• Compute Relative Change Compute Relative Change (percentage difference)(percentage difference)

• Investigate Significant DifferencesInvestigate Significant Differences

• Internal AnalysisInternal Analysis

Assets 2000 1999 $ %A B C D

Current Assets (A - B) (C / B) Cash 27,000 21,000 6,000 28.57% Marketable Securities (net) 100,000 81,000 19,000 23.46% Accounts Receivable 120,000 90,000 30,000 33.33% Inventories 12,000 17,000 (5,000) -29.41% Prepaid Expenses 10,000 12,000 (2,000) -16.67%

Total Current Assets 269,000 221,000 48,000 21.72%

Investments 40,000 35,000 5,000 14.29%

Property Plant Equipment Land 75,000 68,500 6,500 9.49% Buildings 880,000 850,000 30,000 3.53% Furniture & Equipment 200,000 190,000 10,000 5.26%

1,155,000 1,108,500 46,500 4.19% Less Accum Depr (381,000) (320,000) (61,000) 19.06% Smallwares 20,500 20,500 - 0.00%

Balance Sheet AnalysisBalance Sheet Analysis• Common Size Statements or Common Size Statements or Vertical Vertical

AnalysisAnalysis

• Total Assets Equal 100%Total Assets Equal 100%

• Total Liabilities and Equity Equals Total Liabilities and Equity Equals 100%100%

• Each Individual Account is Shown as a Each Individual Account is Shown as a Percentage of the Total AssetsPercentage of the Total Assets

• Compare to Industry, Like Businesses Compare to Industry, Like Businesses or Selfor Self

Assets 2000 1999 2000% 1999%

Current Assets Cash 27,000 21,000 2.45% 1.97% Marketable Securities (net) 100,000 81,000 9.06% 7.61% Accounts Receivable 120,000 90,000 10.87% 8.45% Inventories 12,000 17,000 1.09% 1.60% Prepaid Expenses 10,000 12,000 0.91% 1.13%

Total Current Assets 269,000 221,000 24.38% 20.75%

Investments 40,000 35,000 3.62% 3.29%

Property Plant Equipment Land 75,000 68,500 6.80% 6.43% Buildings 880,000 850,000 79.75% 79.81% Furniture & Equipment 200,000 190,000 18.12% 17.84%

1,155,000 1,108,500 104.67% 104.08% Less Accum Depr (381,000) (320,000) -34.53% -30.05% Smallwares 20,500 20,500 1.86% 1.92%

Total PPE 794,500 809,000 72.00% 75.96%

Total Assets (A) 1,103,500 1,065,000 100.00% 100.00%

Balance Sheet AnalysisBalance Sheet Analysis

• Base Year ComparisonsBase Year Comparisons

• Series of YearsSeries of Years

• Compared to a Base YearCompared to a Base Year

HOMEWORKHOMEWORK

• PROBLEM 5PROBLEM 5

• USE THE NUMBERS IN USE THE NUMBERS IN PROBLEM 13 TO PREPARE PROBLEM 13 TO PREPARE COMMON SIZE & COMPARATIVE COMMON SIZE & COMPARATIVE BALANCE SHEETS – IGNORE BALANCE SHEETS – IGNORE INSTRUCTIONS IN PROBLEMINSTRUCTIONS IN PROBLEM